If the turnover of your business is below £5.6 million, there is no legal requirement for you to have a statutory audit.
Saving the annual cost of an audit might be the right decision for your company but think carefully! There are numerous benefits that an independent verification of your accounts can bring to your business.
The importance of these benefits to you will depend on your particular circumstances and your intentions for the future of your business. For example:
1. Are you intending to sell your business at some point?
Tens of thousands of successful business sales take place every year, but the key to a successful transaction is reliable information and knowledge.
Businesses are valued using a number of criteria, but an existing customer base, a well known name, location, marketing/sales strategy and, above all, a proven track record of financial performance are the key determinants.
The existence of regular and continuous independently audited accounts will provide the independent verification a buyer can rely on to value more favourably your business as an investment.
2. Are you divorced from the day to day running of the accounts?
In many instances, the owner-managers of a business devolve responsibility for the day to day management of the accounts to a finance function.
In such circumstances, the audit can provide valuable assurance as to the quality of your business accounts, highlighting weaknesses in internal controls, areas of incorrect data storage, any possible omissions or ineffective accounting processes.
Whilst an audit is not specifically designed to uncover fraud, it is the single most successful safeguard against economic fraud.
3. Will you need to audit your accounts in two years time?
Your current turnover is below the £5.6m threshold at present. However, this may well increase above this limit at some point over the next few years.
If there is a likelihood that this could happen in your business, the cost of the audit when conducted will be significantly higher than if you continue to maintain audited accounts over the growth period.
It is a requirement of any Audit that the accounts for the previous 2 years are also audited as the comparative and pre-comparative figures form part of the financial statements. In many instances, this cost can be more expensive than if you have continued with the annual Audit.
4. Do you have or require bank funding?
The majority of entrepreneurial, owner-managed businesses rely on bank funding in some form or another. Most banks determine the amount, cost and willingness to lend by determining the level of risk their investment will be exposed to.
The presence of an independent audit provides comfort as to the financial performance of a business and as such, provides assurance to the lender of the level of risk. Your risk rating, i.e. the interest rate, or the level of personal guarantee you are required to provide, will in many cases be lower when there is an Audit.
5. Is your credit rating important to your business?
The existence of an Audit can help to assure many prospective suppliers of your strength as a business and the quality of your financial statements, which could improve your attractiveness to creditors.